Have High Stock Prices Slowed Down the Economy?

Conservatives like Paul Ryan have been crying wolf about inflation in the general economy for years now, yet inflation has been essentially flat for the last two decades. A large part of the reason is that wages have been stagnant, declining in real terms during the Bush years. It's only now getting better, with companies like Walmart announcing minimum wage increases.

Yet there is something that has experienced wild Weimar levels of inflation that Republicans have been predicting: stock prices. The stock market more than doubled between 2009 and 2015.

The economy has been improving slowly since the recession, with the United States doing better than most countries. But world-wide the economy has been pretty lackluster, in part because governments -- especially in Europe -- drastically cut spending at a time when their economies needed a boost.

Companies are not sharing their profits with the people who actually do all the work.

But even though the fundamentals have been mediocre, corporate profits have been very high ever since the recession. How come? Partly because companies have been making fewer workers do more work for less money. Companies are not sharing their profits with the people who actually do all the work.

A big reason stock prices have gone up so much is stock buy backs. For example, just this week GM announced $5 billion in stock buybacks and $5 billion in dividends. Target, which just laid off 1,700 workers, announced that it will buy back $15 billion worth of stock over the next five years:

As its new buyback effort kicks in, Target again joins the sizable number of American companies to rely on the financial maneuver, which has drawn criticism despite its uplifting effect on corporate results and stock values.

Josh Mason, a fellow at the Roosevelt Institute in New York who has written about the history of buybacks, said they first accelerated in the 1980s and even more in the last decade. This paralleled a shift in corporate thinking that managers should place shareholders’ interests above those of employees and ­customers, he said.

“It’s the natural effect of the shareholders’ revolution,” Mason said. “People who own stock want to see money in their pockets now.”

You can give GM the benefit of the doubt, a reward for investors who bought company stock to help it recover after the federal government bailed it out. But Target's stock buyback is simple extortion: shareholders have vowed to destroy the company unless they get their pound of flesh.

How do companies justify buy backs? They claim it will increase earnings per share, a metric that shareholders use to measure share values. Not by increasing earnings, but by reducing the number of shares. It's sheer sophistry. Instead of doing something concrete to make the company actually earn more money, they will spend billions just to make it look like they're earning more money.

Companies are spending billions placating activist investors instead of building for the future.

Target is not unique. Shareholders across the board have been demanding they be placated. Thus, companies are no longer investing money in their futures. Target's stock buybacks will only make it more difficult for the ailing company fix its problems.

But why do shareholders deserve more money? The overwhelming majority of them contribute absolutely nothing to a company's bottom line. They simply buy stock on the open market from other shareholders, who bought it from other shareholders, who bought it from other shareholders.

"Activist" investors like Carl Icahn have become the norm. They buy up stock in companies and squeeze the cash out of them like Gordon Gekko, with little care for the future of the company or its workers. 

The vast majority of shareholders take no real risks, never contribute a single dime to the companies they own stock in, never do a lick of work to contribute to the company's success. They're just playing roulette on the stock market instead of in a casino.

But increasingly, shareholders are forcing corporate management to make foolish short-term decisions that take cash out of the company to pay off shareholders in dividends, and jack up the stock price by spending billions on stock buybacks.

So you gotta ask: how much are cynical economic manipulations like stock buybacks slowing the growth of the economy? Companies justify the buybacks by saying that demand for the their products is low, so there's no sense in spending money on expanding their business, so they consolidate their gains. But it all goes into the hands of shareholders.

But why demand is low? Because companies are laying people off and paying lower wages, and fewer people can afford to buy the products the companies make.

Instead of the vicious cycle of inflation that Republicans keep predicting, we're stuck in the virtueless cycle of wage deflation for the people who actually do all the work, and hyperinflation in stock prices that reward the leeches on Wall Street who caused the recession in the first place.